Romania Monthly Focus: Let’s call the duck, a duck

It's actually a sitting duck and it refers to Romania's fiscal stance, which is at risk of being significantly derailed from its short-term targets, after having breached its medium-term objective since 2016. Ourselves as well as the larger local macro analyst community, along with the European Commission, the Fiscal Council and Romania's central bank have repeatedly warned about Romania's fiscal policy being pro-cyclical and hence prone to risks of falling in the Excessive Deficit pit (i.e. breaching the 3% budget deficit ceiling) should the economic cycle turn, but the recent events and current circumstances are such that an EDP accident has for us become part of the baseline scenario for the next 2 years. There are several factors at play in this scenario, most of which we would have played down as general risks were not for the heavy electoral calendar that lies ahead of us, which makes it considerably less likely that fiscal adjustment measures will be taken.

That is a problem, especially in the context of the recently adopted public pensions law, which envisages a heavy social spending bill already in the next 2 years.

Chart 1: General consolidated budget deficit estimates vs. target in absence of compensatory measures (ESA2010 terms, % GDP).

As seen in Chart 1, we envisage that, without any financing measures being taken by the government, only the pension point increases enshrined by the pension law should lead to a budget deficit of 4.0% of GDP in 2020 and 5.4% of GDP in 2021. This is even before accounting for likely increases in the number of pensioners and before taking account of the changing methodology for calculating public pensions, which according to authorities' claims, should lead to more generous retirement benefits.

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